Home / Politics / Policy /  Govt clears bailout for state electricity distribution firms

New Delhi/Mumbai: The government on Monday approved an ambitious plan to bail out beleaguered state electricity distribution companies, or discoms, through a restructuring of their short-term loans.

The electricity distribution companies owned by the state governments are finding it difficult to raise working capital and owe a staggering 2 trillion to banks and financial institutions. They are servicing the interest on existing loans through fresh borrowings, an indication as well as, in some ways, a cause of the ongoing crisis in India’s power sector.

According to the contours of the bailout package proposed by the Union power ministry and approved by the cabinet committee on economic affairs on Monday evening, states will take over half the outstanding loans of state electricity boards (SEBs) and convert them into bonds that will be issued to the lenders and backed by state government guarantees.

The lenders are to restructure the remaining 50% and provide a three-year moratorium on principal repayments.

The move will also likely benefit private power companies, many of which find themselves in trouble with their sole customers—the discoms—not having money to pay for power.

According to the restructuring plan, states will be part of tripartite agreements signed to implement the debt recast. SEBs will also promise to revise tariffs regularly and in correlation with their costs, besides working to reduce theft, transmission and billing losses from the present levels of 27%.

The plan isn’t mandatory and SEBs and states have until 31 December to avail of it—if they choose to.

“This will be implemented in the form of a scheme and we will notify it shortly. The states will then work on it," said P. Uma Shankar, Union power secretary.

The Union government will provide a grant to the states if they exceed their loss reduction targets, and reimburse states 25% of the principal they repay.

Such an exercise will also help infuse capital into a sector that desperately needs funds and boost the net worth of SEBs.

Since the health of the power distribution sector holds the key to the success of generation projects, the government is worried about the funding scarcity facing the power sector, which threatens to worsen an energy deficit that is seen as a key bottleneck in efforts to sustain and boost economic growth.

However, concerns remain about the efficacy of the scheme, given the requirement by the states to acquire the discoms’ debt, which may breach their Fiscal Responsibility and Budget Management limits, as reported by Mint on 24 August.

“It’s a bailout in good faith that the states will mend their ways and reduce their distribution losses. They were given a chance 10 years back and they behaved properly in the initial years. Here, the banks are getting affected and the distribution sector is vital to the revenue cycle. The states will now be lifting liabilities," said Anil Razdan, a former power secretary.

The problem started when Indian banks started lending to the state discoms to meet working capital requirements. Given the mounting losses of the discoms, the finance ministry issued a directive to the banks to stop such lending, triggering fears that there could be defaults on outstanding loans.

Indian banks’ loans outstanding to the power sector rose to 3.4 trillion as of July 2012 from 2.9 trillion in July 2011, up 17.2%, according to Reserve Bank of India (RBI) data.

A 30 August statement by rating agency Crisil Ltd, the local unit of Standard and Poor’s, said the “exacerbating refinancing and liquidity pressure, especially for the state power utilities", could lead to the restructuring of nearly 1.5 trillion of debt, of which 60,000 crore has been recast so far by banks.

A 20 September Bank of America-Merrill Lynch report said the banks with the highest exposure to SEBs are Indian Bank, Union Bank of India, Bank of India, Oriental Bank of Commerce and Canara Bank.

The banking sector’s exposure to the discom in Uttar Pradesh is around 20,000 crore and State Bank of India (SBI) accounts for about 4% of this— 800 crore. “We think that the most stressed discoms are Rajasthan, Uttar Pradesh, Andhra Pradesh, Tamil Nadu and perhaps to some extent Punjab. These are the discoms which will have to work extra hard and look at higher revenue generation. Overall, our discom exposure is 4-5%. Our power sector exposure is loaded towards the large generating companies and they are rated," SBI chairman Pratip Chaudhuri said.

The bank has a total exposure of around 8,000 crore to discoms and said there was no cause for concern. The loans are performing, said Diwakar Gupta, managing director and chief financial officer of SBI.

“We do not have a single NPA (non-performing asset) in SEB loans. These loans are renewed year after year," Gupta said. He declined to comment on the approval for SEB restructuring, saying he was yet to study the changes.

M.V. Tanksale, chairman and managing director of Central Bank of India, said the government proposal cannot be termed as a bailout or loan waiver. Central Bank of India has an exposure of about 12,000 crore to discoms and has no NPAs from this portfolio, he said. About 9,000 crore of loans have been restructured by the bank.

“The loans are safe because the discoms are largely disciplined now. They have implemented the tariff revisions and taken necessary reforms," Tanksale said. “State governments have to make provisions for the money that they will guarantee and the large repayment schedule of 12-15 years itself ensures that the loans (can) be repaid without any stress on the sector."

Analysts said the loans could turn bad if discoms do not recover from their losses. According to their estimates, out of the 2 trillion loans to these electricity boards, 1.75 trillion has been given by Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd (REC), while banks’ exposure is limited to 4-9% of their loan book.

“Currently, most of the loans given to state electricity boards are not bad as these companies get constantly refunded by the sovereign guarantee they enjoy. However, servicing these loans may be difficult as these companies are running in loss," said Saikiran Pulavarthi, an analyst at Espirito Santo Securities India Pvt. Ltd.

The impact on state-run banks will be limited as most of the loans are provided by PFC and REC, other analysts said. The bank loans are mostly working capital loans, which can be converted into term and state government loans.

The government move is a positive step as the restructuring exercise will prevent these loans turning bad, said Manish Ostwal, senior analyst at Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.

“This decision will have the worst impact on power generation companies because these SEBs could now delay payments further," Ostwal said. “We think that this is a one-time move by the government to kick off the investment cycle in the sector, and the fact that state governments are a part of it puts some accountability in it."

Many distribution utilities are saddled with losses arising from theft, besides transmission and billing inefficiencies. Some regularly buy expensive power to tide over short-term deficits, and several haven’t revised rates in years. The poor financial health of these distribution firms means they cannot raise money at all.

The political compulsion to provide free power to farmers has also taken a heavy toll. As agricultural power supply is unmetered, many utilities write off all their losses from transmission and distribution as farm consumption.

In addition, tariff revisions are inadequate as the average increase falls behind power purchase costs. The poor financial health is also on account of non-payment of subsidy amounts by the state governments.

The cumulative losses of the distribution utilities increased from 1.22 trillion in 2009-10 to 1.9 trillion as of March 2011. Interestingly, according to a study conducted by energy consulting company Mercados EMI Asia for the 13th Finance Commission, the projected losses in 2014-15 were expected to be 1.16 trillion.

Anup Roy and Joel Rebello in Mumbai contributed to this story.

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